What are the different types of solar financing?

After coming off another record year in 2014, growing by 34% over 2013, the U.S. solar industry is showing no signs of slowing down. As of the first quarter (Q1) of 2015, more than 51% of all new electric generating capacity in the United States came from solar power alone, with the residential and utility PV market segments each adding more capacity than the natural gas industry brought online in Q1.

This from the latest Market Insightreport from the Solar Energy Industries Association (SEIA) and GTM Research, which expects another record year for solar power and continued growth over the next couple of years. For the average business or homeowner who still thinks solar is out of reach, these figures might have little meaning, but they should because solar energy is more affordable than ever before and is proving a wise investment option.

According to a 2014 report from North Carolina State University’s public service and research administration, NC Clean Energy Technology Center, a fully financed, typically sized solar PV system is a better investment today than the stock market and, in many cities, costs less than energy from a local utility.

“Of the single-family homeowners in America’s 50 largest cities, we estimate that 9.1 million already live in a city where solar costs less than their current utility rates if they bought a PV system outright and nearly 21 million (93% of all estimated single-family homeowners in those cities) do if low-cost financing is available,” wrote Autumn Proudlove and Jim Kennerly in the report, entitledGoing Solar in America.

What’s more is that solar energy is growing despite below-average temperatures as experienced in the Northeast earlier this year. TheGoing Solar report even found that customers with a 5-kW system in Chicago or Boston, cities known for cold winters, could offset more power than in Phoenix, a location with some of the best solar resource in the U.S.

“There is a clear information gap,” said Proudlove, “Despite solar’s dramatic cost declines, there’s still a widespread mentality that solar is only a viable option for the wealthy. We hope that our work will help people realize that solar is often a financially attractive option for the average American homeowner today, providing a long-term, relatively low-risk investment.”

Falling prices and changing financial models

Since the implementation of the Solar Investment Tax Credit (ITC) in 2006, a federal 30% tax credit for solar systems, the cost to install solar has dropped by more than 73%. Depending on location, panel prices vary but SEIA puts the residential system costs at $3.48 per watt as of late last year, which is a 3.3% decrease from the previous quarter and a substantial drop in price from a decade ago.

“When the declining cost of solar is coupled with the rising cost of grid electricity, the financial case for solar can be quite persuasive, particularly for locales with higher than average electricity rates,” explained Proudlove and Kennerly in their report.

Although third-party ownership still remains the dominant model for financing solar installations in the U.S., at least for residential and commercial systems, times are changing. PV systems continue to get cheaper and it is now easier than ever to access low-cost financing.

Third-party financing primarily occurs through two models: power purchase agreements (PPAs) and solar leases. In thePPA model, a developer builds a solar energy system on a customer’s property at no cost, but the system helps offset the electric utility bill. The developer then sells the power generated to the customer at a fixed rate, typically at a price that’s lower than the local utility. In the lease model, rather than paying for the power produced, the customer signs a contract with a developer and pays for the solar system over a period of years or decades.

Because the number of banks and leasing companies has increased in direct relation to the growth of the solar market, however, direct ownership and unique financing models are gaining momentum.

A survey conducted by Mosaic, a solar finance pioneer, found that two times more respondents would prefer to own a residential rooftop system rather than lease it, assuming savings and performance are similar.

Mosaic offers solar loans and a unique financial model that includes a peer-to-peer network designed to connect individuals seeking funding with others who provide the loans.

“In the past, we funded many commercial projects with thousands of retail investors and we launched a home solar loan last year that’s growing fast. Solar installers around the country use our software to provide financing to homeowners,” said Billy Parish, CEO of Mosaic. “There is a massive shift happening where homeowners in the U.S. prefer solar ownership to leases.”

Dividend Solar is another online company connecting individuals interested in going solar but they’ve added installers to the list, offering system monitoring, product warranties, and performance and maintenance guarantees.

“We connect creditworthy homeowners, customer-centric installers, and financial investors, creating partnerships and aligning interests to enable all members of the solar value-chain to benefit,” this according to their website. “With our zero-down loan, homeowners realize the maximum economic benefits of full solar ownership.”